To follow up on our earlier post on Basel II use tests – the BCBS yesterday released a set of 4 principles in their latest newsletter, called “The IRB Use Test: Background and Implementation“.
To be honest, the principles are fairly generic and if you use tests are not complying with these principles already then calling them a use test is probably incorrect.
That said, the principles are:
- Banks are responsible for demonstrating their compliance with the use test.
- Internal use of IRB components should be sufficiently material to result in continuous pressure on the quality of IRB components.
- Demonstrating consistency and explaining differences between IRB components and internal measures can establish sufficient comfort that the first two principles are met.
- The importance of an internal process to the bank’s decision making influences the extent to which that process contributes to an assessment of use test compliance. Banks should take a holistic approach when assessing overall compliance of their institution with the use test requirements.
The real interest is, as usual, in the commentary below the principles – so, if this is an area you need to know, read the newsletter.